PURCHASE OF DEBENTURES BEFORE THE SPECIFIED DATE OF PAYMENT OF INTEREST [CUM-INTEREST AND EX-INTEREST QUOTATIONS]

PURCHASE OF DEBENTURES BEFORE THE SPECIFIED DATE OF PAYMENT OF INTEREST [CUM-INTEREST AND EX-INTEREST QUOTATIONS] :

Interest on debentures is generally paid half-yearly to the holders on certain specified dates, e.g., 30th September and 31st Mach every year. If debentures are purchased exactly on these specified dates, it involves no problem. In such a case, interest is payable to the holders of debentures. But, where debentures are purchased at a date before the specified date of payment of interest the question which naturally arises is whether the price paid for such debentures includes the interest for the expired period (i.e. from the previous date of payment of interest up to the date of purchase) or not.

For this purpose it is important to note whether the price paid for the debentures is quoted as “Cum-interest” or “Ex-interest”. If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”. If, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”. In case of Ex-interest quotation, interest has to be paid to the holders for the expired period in addition to the price paid for the debentures. In any case, the company must pay interest for the expired period and while making entry in its books at the time of purchase of the debentures, the amount paid by way of interest should be treated separately from the price actually paid for the debentures. For example, if a company purchases 10 of its 9% Debentures of 100 each at 95 each on 1st August, 2014 the dates of payment of Interest being 30th September and 31st March, the treatment of the same for “Cum-interest” and “Ex-interest” quotations will be as follows:

N.B. If nothing is stated, purchase and sale of debentures and government securities should be taken to be on
ex-interest basis. That of shares should be presumed to be on cum-dividend basis.

(1) In case of cum-interest quotation: If the purchase price of 95 is taken to be the cum-interest price, it implies
that this includes the interest for the expired period of 4 months (i.e. from 1st April, 2014 to 31st July, 2014 which
amounts

Therefore, the price actually paid for the debenture should be taken at (`95 – `3) = `92. The accounting entry in
such a case should be as follows:

(i) If debentures are purchased for immediate cancellation

9% Debentures A/c                                       Dr.          1,000                         with the nominal value of 10 debentures
Debenture Interest A/c                               Dr.             30                            with the interest for expired period on 10

debentures

To Bank 950 with the price paid
To Profit on Redemption of Debentures A/c   80                          with the difference

(ii) If debentures are purchased as investment

Own Debentures A/c                                  Dr.               920                         with the actual price paid

Debenture Interest A/c                             Dr.                 30                         with the interest for expired period on 10
debentures

To Bank 950                                                                                 with the total

Note: The question of profit or loss on redemption of debentures does not arise here as the debentures are purchased as investment. In such a case, Own Debentures A/c should always be debited with the actual price paid for them.

However, when these debentures are cancelled in future, the entry would be:
9% Debentures A/c                                   Dr.                 1,000
To Own Debentures                                     920
To Profit on Redemption of  Debentures                 80

Profit on cancellation of debentures must be transferred to capital reserve account.

(2) In case of ex-interest quotation: If the purchase price of `95 is taken to be the ex-interest price it implies that
this does not include the interest for the expired period of 4 months (i.e. from 1st April, 2014 to 31st July, 2014
which amounts to

In this case, the price of ` 95 represents the price actually paid for the debentures and the company is required
to pay ` 3 for every debenture as interest in addition to the purchase price of `95. Therefore, the company is
required to pay (Rs.95 +Rs.3) =Rs.98 for every debenture in total. The accounting entry in such a case should be as
follows:

(i) If debentures are purchased for immediate cancellation

9% Debentures A/c                           Dr.          1,000                           with the nominal value of 10 debentures

Debenture Interest A/c                   Dr.              30                        with the interest for expired period on 10 debentures

To Bank                                                                    980      with the total amount paid on 10 debentures

To Profit on Redemption of Debentures A/c        50     with the difference

 

(ii) If debentures are purchased as investment

Own Debentures A/c                                           Dr.              950             with the actual price paid for 10 debentures

Debenture Interest A/c                                      Dr.                30             with the interest for expired period on 10                                                                                                                                      debentures

To Bank                                                                  980            with the total

When these debentures are cancelled:

9% Debentures A/c                                      Dr.            1,000

To Own Debentures                                                         950

To Profit on Redemption of Debentures A/c              50

The Profit on redemption of debenture must be transferred to capital reserve account.

Illustration :(When debentures are purchased for immediate cancellation and there is no Sinking Fund)

Favourite Ltd. had 2,000, 12% Debentures of `100 each as on 1st April, 2013. As per the terms of issue, the
company purchased the following debentures in the open market for immediate cancellation:

1st May            –                             400 Debentures at Rs.98 cum-interest
1st January    –                              800 Debentures at Rs.100.25 cum-interest
1st March       –                              200 Debentures at Rs.98.50 ex-interest

Assuming that debenture interest was payable half-yearly on 30th September and 31st March and the Income tax
was deductible at the rate of 10% at source. Show the journal entries in the books of the company and prepare the necessary ledger accounts. The company closes its books on 31st March.

Solution:

 

Journal Entries

Date	Particulars	Dr. (Z)	Cr. (! )
2013
May 1	12% Debentures A/c                                                              Dr.	40,000
	Debenture Interest A/c                                                            Dr.	400
	To Bank		39,200
	To Profit on Redemption of Debentures A/c		1,200
	(Cancellation of 400 Debentures of Rs100 each by purchase in the open market at Rs98 cum-interest)
	The above entry is the combined entry of the following two entries:
“	12% Debentures A/c                                                              Dr.	40,000
	To Bank		38,800
	To Profit on Redemption of Debentures A/c		1,200

	Debenture Interest A/c                                                          Dr.	400
	To Bank		400
Sep.30	Debenture Interest A/c                                                          Dr.	9,600
	To Debentureholders A/c		8,640
	To Income-tax Payable A/c		960
	(Interest due on the outstanding debentures of ! 1,60,000 at 12% p.a. for 6 months less Income-tax @ 10%)
it	Debentureholders A/c                                                          Dr.	8,640
	To Bank (Payment made for interest)		8,640
“	Income-tax Payable A/c                                                       Dr.	960
	To Bank		960
	(Deposit of Income-tax with the Government)
2014
Jan. 1	12% Debentures A/c                                                             Dr.	80,000
	Debenture Interest A/c                                                          Dr.	2,400
	To Bank		80,200
	To Profit on Redemption of Debentures A/c		2,200
	(Cancellation of 800 Debentures of ! 100 each by purchase in the open market at ! 100.25-cum-interest)
2014	12% Debentures A/c                                                             Dr.	20,000
Mar. 1	Debenture Interest A/c                                                          Dr.	1,000
	To Bank		20,700
	To Profit on Redemption of Debentures A/c		300
	(Cancellation of 200 Debentures of Z 100 each by purchase at ! 98.50 ex-interest, ! 1,000 paid for interest debited to Debenture  Interest A/c)
2014
Mar. 31	Debenture Interest A/c                                                          Dr.	3,600
	To Debentureholders A/c		3,240
	To Income-tax Payable A/c		360
	(Interest due on the outstanding debentures of Z 60,000 at 12% p.a. for 6 months less Income-tax @ 10%)
“	Debentureholders A/c                                                          Dr.	3,240
	To Bank (Payment made for interest)		3,240
“	Income-tax Payable A/c                                                       Dr. To Bank (Deposit of Income-tax with the Government)	360	360

 

“	Profit and Loss A/c                                                               Dr.	17,000
	To Debenture Interest A/c		17,000
	(Transfer of Debenture Interest to Profit and Loss A/c)
“	Profit and Loss Appropriation A/c                                      Dr.	1,40,000
	To Debenture Redemption Reserve A/c		1,40,000
	(Transfer of nominal value of the debentures cancelled during the year to Debenture Redemption Reserve A/c out of the profits of the company)
“	Profit on Redemption of Debentures A/c                           Dr.	4,200
	To Capital Reserve A/c		4,200
	(Transfer of capital profit to Capital Reserve A/c)

 

Note: Income-tax authorities do not recognise interest for the broken period, for them the actual amount paid is
the purchase/sale price of the debentures. Hence no income-tax is to be deducted in cases of interest to be
recorded on purchase/sale of debentures in the middle of the interest period.

 

Ledger Accounts

12% Debentures A/c

Dr.                                                                                                                                                                                                      Cr.

Date	Particulars	Rs.	Date	particulars		Rs.
1.5.2013	To Bank (excluding interest)	38,800	1.4.2013	By Balance b/d		2,00,000
“	” Profit on Redemption of Debentures A/c	1,200
1.1.2014	To Bank	77,800
“	” Profit on Redemption of Debentures A/c	2,200
1.3.2014	“ Bank	19,700
	“ Profit on Redemption of Debentures A/c	300
31.3.2014	“ Balance c/d	60,000
		2,00,000				2,00,000

 

Debenture Interest A/c

Dr.                                                                                                                                                                                                  Cr.

Date	Particulars	Rs.	Date	particulars		Rs.
1.5.2013	To Bank	400	31.3.2014	By Profit and Loss A/c		17,000
30.9.2013	“ Debentureholders A/c	8,640
“	” Income-tax Payable	960
1.1.2014	“ Bank	2,400
1.3.2014	“ Debentureholders A/c	1,000
31.3.2014	“ Debentureholders A/c	3,240
“	” Income-tax Payable	360
		17,000				17,000

 

Profit on Redemption of Debentures A/c

Dr.                                                                                                                                                                                                  Cr.

Date	Particulars	Rs.	Date	particulars		Rs.
31.3.2014	To Capital Reserve Account	3,700	1.5.2013	By 12% Debentures A/c		1,200
			1.1.2014	By 12% Debentures A/c		2,200
		———-	1.3.2014	By 12% Debentures A/c		300
		3,700				3,700

 

 

 

 

 

Notes: (1) `98 cum-interest price includes interest `1 for the expired period of one month (i.e., April 2012).

(2) `100.25 cum-interest price includes interest of `3 for the expired period of 3 months (i.e. October, November
and December, 2012).

(3) `98.50 ex-interest price excludes interest of `5 for the expired period of 5 months (i.e., October 2012 to
February, 2013).

Illustration :(When debentures are purchased for immediate cancellation and Sinking Fund exists).
The following balances appeared in the books of Cheerful Ltd. as on 1st April, 2013:
9% Debentures (face value `100) –                                                                                                                          Rs.1,50,000
Debenture Redemption Fund –                                                                                                                                Rs.75,000
Debenture Redemption Fund Investment –                                                                                                          Rs.75,000
(in 8% Government Bonds of the face value of Rs.90,000)

Interest on the debentures was payable on 30th September and 31st March and interest on Government Bonds was receivable on the same dates.

On 31st May, 2013 the company purchased for immediate cancellation 250 debentures in the market at Rs.95 each cum-interest. The amount required for this was raised by selling 8% Government Bonds of the face value of Rs.27,000.

On 31st March, 2013 Rs.20,800 was appropriated for the Sinking Fund and on the same date 8% Government Bonds were acquired for the amount plus the interest on investments. The face value of the Government Bonds acquired was Rs.28,000.

You are required to show the journal entries and ledger accounts in the books of the company. Ignore Income tax.

Solution:

Journal Entries

Date	Particulars	Dr. (Rs.)	Cr. (Rs.)
2013
31-May	Bank                                                                                          Dr.	23,750
	To Debenture Redemption Fund Investment A/c		23,390
	To Interest on Debenture Redemption  Fund Investment A/c (Sale of Debenture Redemption Fund Investments of the face value of Rs.27,000 at Rs.23,750including interest for 2 months upto 31.5.2011)		360
“	Debenture Redemption Fund Investment A/c Dr.	890
	To Debenture Redemption Fund A/c (Transfer of profit on sale of Investments to Debenture Redemption Fund Account)		890
“	9% Debentures A/c                                                                  Dr.	25,000
	Debenture Interest A/c                                                     Dr.	375
	To Bank		23,750
	To Profit on Redemption of Debentures A/c                                                                                                                                                                                                                    (Cancellation  of 250 Debentures of Rs.100 each by purchase atRs.95 cum-interest)		1,625
Sep.30	Debenture Interest A/c                                                Dr.	5,625
	To Debentureholders (Interest) A/c (Interest due on the outstanding debentures of Rs.1,25,000 at 9% p.afor 6 months)		5,625
Sep.30	Debentureholders (Interest) A/c                                       Dr.	5,625
	To Bank (Payment made for interest)		5,625
“	Bank                                                                                           Dr.	2,520
	To Interest on Debenture Redemption Fund Investment A/c (Receipt of interest on the balance of  investments of Rs.63,000 at 8% p.a. for 6 months)		2,520
2014         Mar.31	Debenture Interest A/c                                                 Dr.	5625
	To Debenture holders (Interest) A/c (Interest due on the outstanding debenture of Rs.1,25,000 at 9% p.a. for 6 months)		5625
“	Debenture Debenture holders  (Interest )A/c      Dr.	5625
	To bank  A/c (Payment made for interest)		5625
“	Bank                                                                                                  Dr.	2,520
	To Interest on Debenture Redemption Fund Investment A/c (Receipt of interest on the balance of  investments of Rs.63,000 at 8% p.a. for 6 months)		2,520
“	Profit and Loss A/c                                                               Dr.	11,625
	To Debenture Interest A/c (Transfer of Debenture Interest to Profit and Loss A/c)		11,625
“	Interest on Debenture Redemption Fund Investment A/c   Dr.	5,400
	To Debenture Redemption Fund A/c (Transfer of interest received on   investment to Debenture Redemption Fund A/c)		5,400
“	Profit and Loss Appropriation A/c                             Dr.	20,800
	To Debenture Redemption Fund A/c (Transfer of annual profit to Debenture Redemption Fund A/c)		20,800
“	Debenture Redemption Fund Investment A/c      Dr.	26,200
	To Bank (Investment of annual profit and interest received on investment)		26,200
“	Debenture Redemption Fund A/c                              Dr.	25,000
	To General Reserve A/c (Transfer of nominal value of 250 debentures cancelled during the year)		25,000
“	Profit on Redemption of Debentures A/c                           Dr.	1,625
	To Debenture Redemption Fund A/c (Transfer of capital profit on redemption of debentures)		1,625
“	Debenture Redemption Fund A/c                                      Dr.	2,515
	To Capital Reserve A/c (Transfer of profit of capital profit)		2,515

 

Ledger Accounts
9% Debentures Account

Date   `	Particulars	Rs.	Date   `	Particulars	Rs.
31.5.2014	To Bank	23,375	1.4.2013	By Balance b/d	1,50,000
“	” Profit on Redemption of Debenture A/c	1,625
31.3.2014	To Balance c/d	1,25,000			________
		1,50,000			1,50,000
			1.4.2014	By Balance b/d	1,25,000

 

Debenture Redemption Fund Account

Date   `	Particulars	Rs.	Date   `	Particulars	Rs.
31.3.2013	To General Reserve A/c	25,000	1.4.2013	By Balance b/d	75,000
“	” Capital Reserve A/c (1,625 + 890)	2,515	31.5.2013	“ Profit on Redemption of Debenture A/c	1,625
“	” Balance c/d	76,200		“ Deb. Red. Fund Investment A/c (Profit on Sale)	890
			31.3.2014	“ Interest on Deb. Red. Fund Investment A/c	5,400
		—————–	“	” Profit and Loss Appropriation A/c	20,800
		1,03,715			1,03,715
			1.4.2014	By Balance b/d	76,200

Debenture Redemption Fund Investment Acount

Date   `	Particulars	Rs.	Date   `	Particulars	Rs.
1.4.2013	To Balance b/d (`90,000)	75,000	31.5.2013	By Bank	23,390
31.5.2013	“ Debenture Red. Fund A/c	890	31.5.2013	” Balance c/d (face value Rs.91,000)	78,700
31.3.2014	“ Bank (28,000)	26,200
		_______			_______
		1,02,290			1,02,290
1.4.2014	To Balance b/d (face value ` 91,000)	78,700

 

Profit on Redemption of Debentures Account

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014	To  Debenture Redemption Fund A/c	1,625	31.5.2013	By 9% Debentures A/c	1,625
		1,625			1,625

 

Debenture Interest Account

Date	Particulars	Rs.	Date	Particulars	Rs.
30.9.2013	”    Debentureholders A/c	5,625
31.3.2014	”    Debentureholders A/c	5.625
		11,625			11,625

 

Interest on Debenture Redemption Fund Investment A/c

Date	Particulars		Date	Particulars
31.3.2014	To  Debenture Redemption Fund A/c (transfer)	5,400	31.5.2013 30.9.2013 31.3.2014	By Bank ”       Bank ”       Bank	360 2,520 2,520
		5,400			5,400

 

Working Notes:

1. Purchase price of 250 Debentures of Z 95 each cum-interest = 250 x ! 95 = ! 23,750 which includes interest on ! 25,000 (face value of 250 debentures) at 9% p.a. for the expired period of 2 months (i.e., April and May 2013 amounting to 375 i.e., ! 25,000 x 9/100 x 2/12.

Therefore, price actually paid for 250 debentures

= ! (23,750 — 375) = ! 23,375.

2. Profit on Redemption of Debentures

Face value of 250 debentures cancelled                         =                 ! 25,000

Less: Price actually paid for 250 debentures =                    ! 23,375

Profit on redemption of 250 debentures                           =               ! 1,625

3. Sale proceeds of investments: According to the problem, realised value of investments must be equal to the total amount payable for 250 debentures.

Realised value of investments = ! 23,750.

This value includes interest on investments for the expired period of 2 months (April and May) on the face value of investments ! 27,000 at 8% p.a. which amounts to Z 360, i.e., 27,000 x 8/100 x 2/12.

Therefore, net realised value of investments

= !(23,750 – 360) = !23,390.

4. Profit on sale of investments: Book value of the investments sold:

                 (Rs.27,000x Rs.75,000/Rs.90,000)                 =   Rs. 22,500

But net realised value of the investments  Profit on sale of investments

= Z 23,390 = Z (23,390 — 22,500)

 

                                                                                                  = Z 890

Illustration : (Where debentures are purchased as investments and no Sinking Fund exists. This also includes treatment of interest on own debentures).

In the books of Joy Ltd., the 12% Debentures Account showed a credit balance of! 2,00,000 consisting of 2,000 debentures of Z 100 each as on 1st April, 2013.

During the year debentures were purchased in the open market as follows: 1st August, 300 Debentures at ! 95 ex-interest.

1st November, 200 Debentures at ! 98 cum-interest.

The Debentures, thus, purchased were retained as investments of the company. Interest on debentures was payable half-yearly on 30th September and 31st March every year.

You are required to show the journal entries and the ledger accounts in the books of the company. Ignore Income-tax. Also show how the items would appear in the Balance Sheet.

 

Solution:

Journal Entries

 

 

Date	Particulars	Dr. (Z)	Cr. (! )
2013
Aug. 1	Own Debentures A/c                                                            Dr.	28,500
	Debenture Interest A/c                                                          Dr.	1,200
	To Bank		29,700
	[Purchase of 300 Debentures of Z 100 each at ! 95 ex-interest as investments and payment of interest for the expired period of 4 months (i.e., April to July) at 12% p.a.]

136 EP-CA&AP Sep.30	Debenture Interest A/c                                                          Dr.	10,800
	To Debentureholders A/c		10,200
	To Interest on Own Debentures A/c (Interest due @ 12% on Z 1,70,000 held by outsiders for 6 months and on ! 30,000 held by the company for 2 months)		600
it	Debentureholders A/c                                                           Dr.	10,200
	To Bank (Payment made for interest due to outsiders)		10,200
Nov. 1	Own Debentures A/c                                                             Dr.	19,400
	Debenture Interest A/c                                                          Dr.	200
	To Bank		19,600
	[Purchase of 200 Debentures of ! 100 each at ! 98 cum-interest as investments including payment of interest for the expired period of one month (i.e., October) at 12% p.a.]
2014
Mar. 31	Debenture Interest A/c                                                          Dr.	11,800
	To Debentureholders A/c		9,000
	To Interest on Own Debentures A/c		2,800
	(Interest due @ 12% p.a. on Z 1,50,000 held by outsiders and out of Z 50,000 held by the company on ! 30,000 for 6 months and on   ! 20,000 for 5 months)
“	Debentureholders A/c                                                           Dr.	9,000
	To Bank (Payment made for Interest due to outsiders)		9,000
“	Profit and Loss A/c                                                               Dr.	24,000
	To Debenture Interest A/c		24,000
	(Transfer of Debenture Interest to Profit and Loss Account)
“	Interest on Own Debentures A/c                                         Dr.	3,400
	To Profit and Loss A/c		3,400
	(Transfer of Interest saved on Own Debentures to Profit and Loss Account)

 

Ledger Accounts

12% Debentures Account

                                                                                                                                                                                                                          Dr.                                                                                                                                                                                                     Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014	To                          Balance c/d	2,00,000	1.4.2013 1.4.2014	By    Balance c/d     By  Balance b/d	2,00,000
		2 00 000			2 00 000
					2,00,000

 

Own Debentures Account

Date	Particulars	Rs.	Date	Particulars	Rs.
1.8.2013 1.11.2013 1.4.2014	To                      Bank To                      Bank To       Balance b/d	28,500 19,400	31.3.2014	By                           Balance c/d	47,900
					47.900
		47.900
		47,900

 

Interest on Own Debenture Account

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014	To         Profit and Loss A/c	3,400	30.9.2013 31.3.2014	By  Debenture Interest A/c ”    Debenture Interest A/c	600 2.800
		3.400			3.400

 

Debenture Interest Account

Date	Particulars		Date	Particulars
1.8.2013 30.9.2013 1.11.2013 31.3.2014	To                        Bank A/c To                                 Debentureholders A/c ”        Interest on Own Debentures A/c ”     Bank ”    Debentureholders A/c ”        Interest on Own Debentures A/c	1,200 10,200600200 9,000 2,800	31.3.2014	By                             Profit and Loss A/c	24,000
		24.000			24.000

 

Balance Sheet of Joy Ltd. as at 31st March, 2014

I. Equities and Liabilities
(1) Non- current liability Long term borrowings                                         1                                 2,00,000

II. ASSETS
(1) Non —current assets Non-Current investment Own Debentures (Face value Z 50,000)		47,900

 

Notes 1. Long term borrowings 2,000, 12% Debentures of Z 100 each fully paid up

2, 00,000

 

Illustration 🙁Cancellation of Own Debentures on a subsequent date where Sinking Fund does not exist)

Continuing Illustration No. 19, if the Debentures held by the company are cancelled on 31st March, 2014, show the necessary journal entries on cancellation and the effect of the same in the Balance Sheet of the company.

Solution:

In addition to the entries made in Illustration No. 19 above, the following entries are required to be passed in the books of the company on cancellation of its Own Debentures:

Journal Entries

 

Date	Particulars	Dr. (()	Cr. (( )
2014
Mar. 31	12% Debentures A/c                                                             Dr.	50,000
	To Own Debentures A/c		47,900
	To Profit on Redemption of		2,100
	Debentures A/c
	(Cancellation of 500 debentures purchased by the company as its investments at a cost of 247,900 resulting into a gain of Z 2,100)
„	Profit on Redemption of
	Debentures A/c                                                                      Dr.	2,100
	To Capital Reserve A/c		2,100
	(Transfer of capital profit resulting from cancellation of own debentures to Capital Reserve Account)
„	Profit & Loss Appropriation A/c                                          Dr.	50,000
	To Debenture Redemption Reserve A/c		50,000
	(Amount equal to the nominal value of debentures redeemed transferred to DRR)

 

Ledger Accounts

                                                                                  12% Debentures Account                                                                                                                                                                                                                                                                                                              Dr.                                                                                                                                                                                              Cr.

 

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2010	To                          Balance c/d	2,00,000	1.4.2009	By Bank	2,00,000
31.3.2014	To Own Debentures A/c	47,900	1.4.2013	By                           Balance c/d	2,00,000
	”        Profit on Redemption
	of Debentures A/c	2,100
„	”    Balance c/d	1,50,000
		2 00 000			2 00 000
			1.4.2014	By                           Balance b/d	1,50,000

 

Own Debentures Account

Date	Particulars		Date	Particulars
1.8.2013 1.11.2013	To                      Bank ”     Bank	28,500 19.400	31.3.2014	By                12% Debentures A/c	47,900
		47,900			47,900

 

Balance Sheet of Joy Ltd. as at 31st March, 2012 I. EQUITIES AND LIABILITIES (1)  Shareholder’s funds
(a) Reserve and Surplus                                     1	52,000
(2)  Non- current liability
Long term borrowings                                       2	1,50,000
Notes 1.  Reserve and surplus
Capital Reserve	2,000
Debenture Redemption Reserve	50.000
	52,000
2.  Long term borrowings 1,500 Debentures of ! 100 each fully paid up	1,50,000

 

Illustration :(When Debentures are purchased as investments of Sinking Fund)

Confident Ltd. had 2,000 12% Debentures of Z 100 each outstanding as on 1st April 2013. The following other balances also appeared in the books of the company on this date:

Debentures Redemption Fund Account                                                              ! 1,00,000

Debentures Redemption Fund Investments:

12% Port Trust Bonds (face valueRs.60,000)                                                             Rs.55,000
Own Debentures (face value Rs.0,000)                                                                       Rs.45,000
Interest on the debentures was payable on 30th September and 31st March and interest on Port Trust Bonds
was received on the same dates.

On 1st August, 2013, ` 20,000, 12% Port Trust Bonds were sold at ` 95 ex-interest and the amount realised was
invested in Own Debentures at ` 97 cum-interest. During the year a sum of ` 5,800 was appropriated for the
Sinking Fund which together with the interest received on Sinking Fund during the year was invested in Own
Debentures at ` 95 each.
You are required to show the journal entries and ledger accounts in the books of the company. Also show how
the items will appear in the Balance Sheet of the company. Ignore Income-tax.

Solution:

Date	Particulars	Dr. (Z)	Cr(()
2013
Aug. 1	Bank                                                                                        Dr.	19,800
	To Debenture Redemption Fund
	Investment (Bonds) A/c		19,000
	To Interest on Debenture Redemption		800
	Fund Investment A/c
	[Sale of 220,000 12% Port Trust Bonds at
	295 Ex-interest and receipt of accrued interest for the expired period of 4 months, (April to
it	July) at 12%] Debenture Redemption Fund Investment
	(Bonds) A/c                                                                            Dr.	667
	To Debenture Redemption Fund A/c		667
	(Transfer of profit on sale of investments to
it	Debenture Redemption Fund A/c) Debenture Redemption Fund Investment
	(Own Debenture) A/c                                                             Dr.	18,600
	Debenture Interest A/c                                                          Dr.	800
	To Bank		19,400
	(Purchase of 200 debentures of 2100 each at
	! 97 cum- interest as investment of Sinking Fund)
Sep.30	Debenture Interest A/c                                                          Dr.	11,200
	To Debenture Redemption Fund A/c		3,400
	To Debentureholders A/c		7,800
	(Interest due on 21,30,000 debentures held by

i”	outsiders for 6 months at 12% and on 270,000 debentures held by the company on 250,000 for 6 months at 12% and on 220,000 for 2 months at 12%) Debentureholders A/c                                                          Dr.	7,800	141
	To Bank		7,800
“	(Payment made for interest due to outsiders) Bank                                                                                       Dr.	2,400
	To Interest on Debenture Redemption		2,400
	Fund Investment A/c
	(Receipt of interest on balance ! 40,000 Port Trust Bonds for 6 months at 12% p.a.)
2014
Mar. 31	Debentures Interest A/c                                                        Dr.	12,000
	To Debenture Redemption Fund A/c		4,200
	To Debentureholders (Interest) A/c (Interest due on Z 1,30,000 debentures held by outsiders and ! 70,000 debentures held by the company for 6 months at 12% p.a.)		7,800
“	Debentureholders A/c                                                          Dr.	7,800
	To Bank (Payment made for interest due to outsiders)		7,800
	Bank                                                                                       Dr.	2,400
	To Interest on Debenture Redemption Fund Investment A/c (Receipt of interest on balance ! 40,000 Port Trust Bonds for 6 months at 12% p.a.) Interest on Debenture Redemption Fund		2,400
“	Investment A/c                                                                      Dr.	5,600
	To Debenture Redemption Fund A/c  (Transfer of interest received on investment to Debenture Redemption Fund Account)		5,600
“	Profit and Loss Appropriation A/c                                      Dr.	5,800
	To Debenture Redemption Fund A/c		5,800
	(Transfer of annual profits to Debenture Redemption Fund A/c)
“	Debenture Redemption Fund Investment                         Dr.	19,000
	(Own Debentures) A/c

	To Bank		19,000
	(Investment of current year’s instalment plus interest received on investment by purchase of 200 own debentures @ Z 95)
“	Profit and Loss A/c                                                               Dr.	24,000
	To Debenture Interest A/c		24,000
	(Transfer of Debenture Interest to Profit and Loss A/c)
“	Debenture Redemption Fund A/c                                       Dr.	667
	To Capital Reserve		667
	(Transfer of profit on sale of investments)

 

Ledger Accounts

Debenture Redemption Fund Account

Dr.                                                                                                                                                                                                                                                                                                                                                                                                                         Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014 „	To                Capital Reserve (Profit on sale) To                                  Balance c/d (Bond) A/c	667 1,19,000	1.4.2013 1.8.201330.9.2013 31.3.2014 „„1.4.2014	By                           Balance b/d ”    Debenture Redemption Fund Investment ”     Debenture Interest A/c (Interest on Own Debentures) ”     Debenture Interest A/c (Interest on Own Debentures) ”    Interest on Debenture Redemption Fund Investment A/c ”        Profit and Loss Appropriation A/c ”     Balance b/d	1,00,000 667 3,400 4,200 5,600 5,800
		1 19 667			1 19 667
					1,19,667

 

6% Debentures Account

Date	Particulars		Date	Particulars
31.3.2014	To                         Balance c/d	2,00,000	1.4.2013 1.4.2014	By                           Balance b/d By                           Balance b/d	2,00,000
		2 00 000			2 00 000
					2,00,000

 

Debenture Redemption Fund Investment

(Port Trust Bonds) Account

Dr.                                                                                                                                                                                                                                                                                                                                                                                                                    Cr.

Date	Particulars		Date	Particulars
1.4.2013 1.8.20131.4.2014	To                          Balance b/d (face value ! 60,000) To                                  Debenture Redemption Fund A/c (Profit on sale) To                          Balance b/d	55,000 667	1.8.2013 31.3.2014	By Bank (face value ! 20,000) By                           Balance c/d (face value ! 40,000)	19,000 36,667
		55.667			55.667
		36,667

 

Debenture Redemption Fund Investment
(Own Debentures) Account)

Date	Particulars		Date	Particulars
1.4.2013 1.8.2013 31.3.2014 1.4.2014	To                          Balance b/d (face value ! 50,000) To                      Bank (face value ! 20,000) To                      Bank (face value ! 20,000) To                          Balance b/d	45,000 19,000 19,000	31.3.2014	By                           Balance c/d (face value ! 90,000)	83,000
		83.000			83.000
		83,000

 

Interest on Debenture Redemption Fund Investment Account

Date	Particulars		Date	Particulars
31.3.2014	To                                  Debenture Redemption Fund A/c	5,600	1.8.2013 30.9.2013 31.3.2014	By Bank (on Z 20,000 for 4 months) ”     Bank (on ! 40,000 for 6 months) ”     Bank (on ! 40,000 for 6 months)	800 2,400 2,400
		5,600			5,600

 

Debenture Interest Account

Date	Particulars		Date	Particulars
1.8.2013 30.9.2013 30.9.2013 31.3.2014	To Bank ”    Deb. Red. Fund A/c ”        Debentureholders (Interest) A/c ”    Deb. Red. Fund A/c ”        Debentureholders (Interest) A/c	800 3,400 7,800 4,200 7,800	31.3.2012	By                            Profit and Loss A/c	24,000
		24,000			24,000

 

Balance Sheet of Confident Ltd. as at 31st March, 2014 I. EQUITY AND LIABILITIES 1. Shareholders fund
(a) Reserve and Surplus	1	1,19,667
2. Non-current liabilities (a) Long term borrowings	2	2,00,000
II. ASSETS (1) Non-current Assets (a) Non-current Investment	3	1,19,667
Notes 1.  Reserve and surplus
Capital reserve	667
Debenture redemption fund	1,19,000	1,19,667
2.  Long term borrowings 2,000 12% Debentures of 2100 each fully paid-up		2,00,000
3.  Non-current investment
Debenture Redemption Fund	36,667
Investment A/c
Post Trust Bonds (Face value ! 40,000)
Own Debentures
(Face value 290,000)	83.000	1,19,667

 

Working Notes:

1. Sale proceeds of 220,000 Port Trust Bonds:

20,000x 95/100 = Rs. 19000

2. Interest accrued on 20,000 Port Trust Bonds sold for the expired period of 4 months (i.e., April to July) at 12%

                  (  =20,000 x 12/100 x4/12 )=Rs.800

3. Profit on sale of 200 Port Trust Bonds: Purchase price of 20,000 Port Trust Bonds

55,000 / 60,000 x 20,000 = Rs.18,333

Sale proceeds of Port Trust Bonds =Rs.19,000

 Profit on sale of Port Trust Bonds = Rs.(19,000 – 18,333) = Rs.667

4. Cost of 200 Own Debentures purchased on 1st August = 200 xRs.97 =Rs.19,400 which includes interest for expired period of 4 months (i.e., April to July) amount to

               (  =20,000 x 12/100 x4/12 )=Rs.800

Actual cost price of 200 debentures = Rs.(19,400 – 400) = Rs.19,000

5. Sinking Fund invested on 31.3.2008 = Annual appropriation of Profit + Interest on Investments of `1,10,000
(face value) at 12% p.a. i.e.Rs.(5,800 + 13,200) =Rs.19,000.

6. Face value of Debentures purchased =Rs.19,000 x = Rs.20,000

Illustration : (Cancellation of Own Debentures on a subsequent date where Sinking Fund exists). Continuing Illustration No. 21 if Own Debentures held by the company are cancelled on 31st March, 2014, show the necessary journal entries on cancellation and the effect of the same in the Balance Sheet of the Company.

Solution:

In addition to the entries made in Illustration No. 21 above, the following entries are required to be passed in the
books of the company on cancellation of its own debentures:

Journal Entries

Date	Particulars	Dr.(Rs.0	Cr.(Rs.)
2014    Mar. 31	12% Debentures A/c                              Dr.	90,000
	To Debenture Redemption Fund  Investment (Own Debentures) A/c		83,000
	To Profit on Redemption of Debentures A/c		7,000
	(Cancellation of 900 12% Debentures of ` 100 each purchased by the company at a cost of ` 83,000 resulting into a gain of ` 7,000)
“	Profit on Redemption of                                     Debentures A/c                                            Dr.	7,000
	To Debenture Redemption Fund A/c		7,000
	(Transfer of capital profit resulting from cancellation of own debentures to Debenture Redemption Fund Account)
“	Debentures Redemption                                                                                                                         Fund Account                                               Dr.	97,667
	To General Reserve A/c		90,000
	To Capital Reserve		7,667
	(Transfer of nominal value of debentures, cancelled during the year to General Reserve A/c and capital profit to Capital Reserve out of Debenture Redemption Fund Account)

 

Debenture Redemption Fund Account

Dr.                                                                                                                                                                                         Cr.

Date	Particulars	Rs.	Date	Particulars	Rs.
31.3.2014	To General Reserve  A/c	90,000	1.4.2013	By Balance b/d	1,00,000
	“ Capital Reserve A/c	7,667	1.8.2013	” Debenture Redemption Fund I	667

	“ Balance c/d (Bond) A/c	29,000		nvestment
			30.9.2013	“ Debenture Interest A/c Interest on OwnDebentures)	3,400
			31.3.2014	“ Debenture Interest A/c (Interest on Own Debentures)	4,200
			“	” Interest on Debenture Re- demption Investment A/c	5,600
			“	” Profit on Redemption of Debentures A/c	7,000
			“	” Profit and Loss Appropriation A/c	5,800
		_______			_______
		1,26,667			1,26,667

 

Balance Sheet of Confident Ltd. as at 31st March, 2014

I. EQUITY AND LIABILITIES
(1) Shareholders fund
(a) Reserve and Surplus	1	1,26,667
(2) Non-current liabilities (a) Long term borrowings	2	1,10,000
II. ASSETS
(a) Non-current Investment	3	36,667
Notes 1.  Reserve and Surplus
Capital reserve	7,667
General reserve	90,000
Debenture redemption fund	29,000	1,26,667
2.  Long term borrowings 1,100 12% Debentures of ! 100 each fully paid-up		1,10,000
3.  Non-current investments
Debenture Redemption Fund Investment A/c		36,667
Post Trust Bonds (Face value ! 40,000)